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Exam 16: Accounting Periods and Methods

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Question 31

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In 2015,Swan Company discovered that it had for the past 10 years capitalized as a production cost certain expenses that are properly classified as administrative expenses.The total amount of the expense for 2014 was $300,000,$60,000 of the item was included in the ending inventory that year and $240,000 was deducted as cost of goods sold.

A) The company should amend its 2014 tax return and reduce its income by $240,000.
B) The company should change its accounting method in 2015,with a $60,000 negative § 481 adjustment which decreases its 2015 taxable income.
C) The company should change its accounting method in 2015,and increase its 2015 income by $60,000,the amount of the positive § 481 adjustment to income.
D) The company should change its accounting method in 2015 and recognize a $60,000 negative § 481 adjustment that will be spread equally over 2015-18.
E) None of the above.

F) A) and D)
G) B) and D)

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Question 32

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In 2015,Beth sold equipment used in her business.Her basis in the property was $300,000 ($500,000 cost less $200,000 of depreciation) .Beth sold the property for $400,000,with $100,000 due on the date of the sale and $300,000 (plus interest at the Federal rate) due in 2016.Beth's recognized gain from the installment sale in 2015 is:

A) $0.
B) $50,000.
C) $100,000.
D) $200,000.
E) None of the above.

F) A) and E)
G) All of the above

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Question 33

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The installment method can be used for which of the following sales with payments being made in the year following the year of sale?

Generally,deductions for additions to reserves for estimated future costs (e.g. ,an allowance for estimated warranty costs) are not allowed for Federal income tax purposes because allowing the deduction would:

The installment method applies where a payment will be received after the tax year of the sale:

The accrual basis taxpayer sold land for $100,000 on December 31,2015.He did not collect the $100,000 until January 2,2016.The land was held as an investment.

Hal sold land held as an investment with a fair market value of $100,000 for $36,000 cash and a note for $64,000 that was due in two years.The note bore interest of 7% when the applicable Federal rate was 4%.Hal's cost of the land was $40,000.Because of the buyer's good credit record and the high interest rate on the note,Hal thought the fair market value of the note was at least $74,000.

The taxpayer had consistently used the cash method of accounting even though inventories were a material income-producing factor to its business.The taxpayer decided to voluntarily change to the accrual method of accounting.The adjustment to income due to the change was that the correct beginning balances for the year of the change as follows: $60,000 for inventories,$30,000 for accounts receivable,and $12,000 for accounts payable.The adjustment due to the change in accounting method is:

Juan,not a dealer in real property,sold land that he owned.His adjusted basis in the land was $700,000 and it was encumbered by a mortgage for $100,000.The terms of the sale required the buyer to pay Juan $200,000 on the date of the sale.The buyer assumed Juan's mortgage and gave Juan a note for $900,000 (plus interest at the Federal rate) due in the following year.What is the gross profit percentage (gain ÷ contract price) ?

Todd,a CPA,sold land for $300,000 cash on the date of sale plus a note for $500,000 due in one year.The interest rate on the note was equal to the Federal rate.The fair market value of the note was $400,000.Todd's basis in the land was $80,000.

In the case of an accrual basis taxpayer,an item of income:

Ivory Fast Delivery Company,an accrual basis taxpayer,frequently has claims for damages to property the company delivered.Often the claim is not filed until a month after the delivery.In the past,approximately 80% of the claims are paid by Ivory.In 2015,claims for $80,000 were filed.The company refused to pay $20,000 of the claims (because they were not valid) ,and paid $50,000.The remaining $10,000 in claims were processed and paid in January 2016.Also,in January 2016,claims for $8,000 were filed for deliveries made in 2015,and $6,000 was paid on these claims by March 15,2016.Ivory has not elected to use the recurring item exception to economic performance.Under the all-events and economic performance tests,Ivory can accrue as an expense for 2015:

The taxpayer had incorrectly been using the cash method of accounting.For 2015,the company voluntarily changed to the accrual method.The adjustment due to the change in method as calculated at the beginning of 2015 was $120,000 (positive) .The adjustment as calculated as of the end of 2015 was $80,000 (positive) .As a result of the change in method,the company must:

Which of the following statements regarding the matching principle is correct?

Abby sold her unincorporated business which consisted of equipment and goodwill.The equipment had an original cost of $200,000 and Abby had claimed $120,000 in depreciation (adjusted basis = $80,000) .Abby had no basis in the goodwill.The sales price for the business was $250,000,with $150,000 for the equipment and $100,000 for the goodwill.The buyer agreed to pay $120,000 on June 30,2015,and $130,000 (plus interest at the Federal rate) in two years.Abby's gain to be reported in 2015 (exclusive of interest) is:

Gray Company,a calendar year taxpayer,allows customers to return defective merchandise for a full refund within 30 days of the purchase.In 2015,the company refunded $400,000 for claims involving sales.The $400,000 consisted of $350,000 in refunds from 2015 sales and $50,000 in refunds from 2014 sales.All of the refunds from 2014 sales were for claims filed in 2014 and were paid in January and February 2015.At the end of 2015,the company had $12,000 in refund claims for sales in 2015 for which payment had been approved.These claims were paid in January 2015.Also in January 2015,the company received an additional $30,000 in claims for sales in 2015.This $30,000 was paid by Gray in February 2016.With respect to the above,Gray can deduct:

Color,Inc. ,is an accrual basis taxpayer.In December 2015,the company received from a customer a $500 claim for defective merchandise.Color paid the customer in January 2016.Also,in December 2015,the company received a bill of $800 for office supplies that had been purchased and used in November 2015.The bill was not paid until January 2016.In January 2016,the company received a claim for $600 for defective merchandise purchased in 2015.Color paid the customer the $600 in February 2015.Assuming Color uses the recurring item exception to economic performance,the company's deductions for 2015 as a result of the above are:

The taxpayer has consistently,but incorrectly,used an allowance for bad debts.At the beginning of the year,the balance in the allowance account is $90,000.

Pedro,not a dealer,sold real property that he owned with an adjusted basis of $120,000 and encumbered by a mortgage for $56,000 to Pat in 2013.The terms of the sale required Pat to pay $28,000 cash,assume the $56,000 mortgage,and give Pedro eleven notes for $12,000 each (plus interest at the Federal rate) .The first note was payable two years from the date of sale and each succeeding note became due at two-year intervals.Pedro did not "elect out" of the installment method for reporting the transaction.If Pat pays the 2015 note as promised,what is the recognized gain to Pedro in 2015 (exclusive of interest) ?

Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years.For 2015,the corporation's income subject to state income tax was $500,000 and the state corporate tax rate was 6%.During 2015,the corporation paid $24,000 on its estimated state income tax liability for that year.The remaining $6,000 of 2015 state income tax was paid in April 2016.In June 2015,the corporation paid $9,000 on its year 2014 state income tax liability,as a result of an audit of the 2014 return that was conducted in 2015.The company has elected to use the recurring item exception to economic performance.As a result of the above,the corporation should deduct in 2015 on its Federal income tax return state income taxes of: